Executive Summary

• Why household balance sheets are worse off than advertised
• Why the recent rosy BLS jobs numbers actually mean bad news
• How the Fed is squeezing investor capital out of other traditional asset pools and into the stock market
• Expect to see the stock market moving higher in 2013; that is, until QE3 fails
• What to expect if QE3 fails sooner than anticipated

If you have not yet read Part I: The Future of Gold, Oil & the Dollar, available free to all readers, please click here to read it first.

Market historians have recently started to point out that the current advance in the S&P500 is now 40 months old and has made gains of over 115% since the March 2009 lows. In other words, the doubling from the lows in price and the duration of the advance now late in its third year together suggest that a cyclical top is near. Furthermore, despite some noise in U.S. macro data – which has been briefly more hopeful, yet remains well within the phase of stagnation – earnings estimates have been coming down as the world economy continues to shift into lower gear.

Perhaps for the first time in a while, we can actually say that the Fed's decision to start QE3 was moderately anticipatory, in contrast to its ad-hoc and reactive policymaking over the past five years. It is not merely that the Fed soberly accepted that the economy was not getting better. The stagnant, tractionless macro data over the past year has spoken quite loudly to that fact. Indeed, the U.S. economy is merely treading water, and the Fed's move to QE3 serves as a sharp retort to those who would relentlessly attempt to portray stagnation as recovery.

Moreover, despite having one of the very worst track records of any institution tasked with economic forecasting, even the Fed could anticipate that the year-long rally in the U.S. dollar would tighten monetary conditions. Also, the extreme volatility in the European economy and its potential to trigger a slowdown in China hang heavy over the world economy.

Finally, there is other data in the U.S., other than the national jobs number, indicating that a slowdown is already at hand.